How to Enable Frame Blending in Blender 2.74?
This option was lost in the transition to 2.5. Not sure exactly why, maybe the design of it didn't fit with the newer design (under the hood, not UI) It might be a Todo item.
You might want to use the program 'slomovideo' http://slowmovideo.granjow.net/
that does pixel-flo type blurs and blends to do this effect. (It is also free and open source)